Strong Legal Regime Research Articles

Law, Organizational Form and Taxes: A Stakeholder Perspective

In a setting where corporate investment imposes positive externalties, the social impact of corporations depends on the sharing rule between the owners of the corporation and non-financial claimants. We examine the role of law and organizational form in altering the sharing rule. Since the legal regime affects the extent to which corporate owners are held responsible for the negative externalties they impose, unlimited liability may discourage investment in strong legal regimes. Limited liability, however, might be accompanied by excessive investment. We highlight the role of the government in altering the sharing rule due its claim through corporate taxation and investigate the relation between law and corporate taxation. We find that corporate tax rates are are a decreasing function of legal strength. Finally, we document supporting evidence using cross-country data.